KPMG Commodity Insights Bulletin – Chromite

KPMG commodity insights bulletin – chromite

November 2018

Introduction This bulletin is part of a series focusing on key mining commodities. Each bulletin aims to provide insights into trends within different commodity sectors.

Specifically, this bulletin provides an outlook on chromite, including recent Commodity outlook macroeconomic and geopolitical developments. A jurisdictional overview of chromite is presented for the most relevant geographies. The market forecast of stainless steel, the principal end product for chromite, is also Chromite discussed. Actual and forecasted pricing are included, as well as key drivers for supply and demand of ferrochrome and chrome ore. Finally, recent M&A –– Chromite is the commercial name of activities are highlighted to assess recent market movements. iron chromium oxide (FeCr2O4), a mineral comprised of chromium and Summary iron oxide that is naturally found in the –– China’s market slowdown in 2015 reduced stainless steel demand and earth’s mantle. When extracted, it is in turn impacted closely related commodities including ferrochrome and referred to as chrome ore. chrome ore. Since then, the Chinese demand for stainless steel has –– Chromite is crucial for the production recovered. South Africa continues to supply the majority of chrome ore of ferrochrome, an alloying agent to meet global stainless steel demand. in manufacturing stainless steel. –– It is expected that the demand for stainless steel will see steady growth Chromite provides the corrosive over the next 5 years, but less than the previous 5 years. As chrome ore resistance properties in stainless and ferrochrome are inputs to stainless steel, it is expected they will also steel, making it an ideal material see steady growth over the next 5 years. for use in a variety of industries. –– In the short term, China is expected to continue playing a dominant role in the supply and demand of stainless steel. In addition, China’s commercialization of integrated nickel pig iron offers a cheaper substitute of pure nickel, in turn lowering the cost of stainless steel, which may be influencing market prices and tilting the global market toward Chinese production. When chromite, the mineral, is extracted from Figure 1: Stainless steel production process the earth’s mantle, it is referred to as chrome ore. Chrome ore is crushed, screened, jigged Chromite is a mineral found in the into chrome concentrate and then smelted into Chromite Earth’s mantel. ferrochrome. Ferrochrome, with nickel, is then processed into stainless steel. The processing of chromite is depicted in Figure 1. As chrome ore, Mined ferrochrome and stainless steel commodities are closely linked, their pricing, demand, and consumption follow similar tends. These are described herein. Chromite that is economically viable is mined and referred to as Chrome ore is essential for the production of Chrome Ore chrome ore ferrochrome. Ferrochrome, in addition to nickel, is vital for stainless steel production. Ferrochrome production accounts for more than 95 percent Crushed and processed of global chrome ore consumption1.Similarly, stainless steel production accounts for more than 80 percent and 70 percent of ferrochrome 2 and nickel consumption, respectively . Hence, Chromite About 95 percent of chrome ore stainless steel is the major driver for demand is used to make ferrochrome.1 and pricing of ferrochrome and chrome ore Concentrate commodities 3.

China has driven stainless steel production over Smelting (high temperature reduction) the past decade. In 2017, China reached 53 percent market share, as shown in Figure 44. China has tapped into easily accessible chrome ore imports to increase ferrochrome production Alloy of iron and chromium. in order to meet its increasing domestic needs Ferrochrome of stainless steel, driven by the construction industry. Increased ferrochrome production has Ferrochrome and nickel are used been achieved by building new furnaces and as base materials in manufacturing switching furnaces previously used for other stainless steel alloys to ferrochrome. In the recent past, China overtook South Africa as the world’s leading Over 80 percent of the world’s ferrochrome producer 5. Stainless Steel ferrochrome is utilized in the production of stainless steel.2

1 ‘Ore Processing’, ICDA, 2011, Page 1, http://www.icdacr.com/story-of-chrome/what-is-chromium/discover-chromium/ore- processing.pdf 2 ‘Ore Processing’, ICDA, 2011, Page 2, http://www.icdacr.com/story-of-chrome/what-is-chromium/discover-chromium/ore- processing.pdf 3 Commodities Comment, Macquarie Research, December 2017, Thomson One 4 Commodities Compendium, Macquarie Research, March 2018, Thomson One 5 ‘South Africa crucial to global chrome supply, Chromium 2017 hears’, Mining weekly, November 2017, http://www. miningweekly.com/print-version/south-africa-crucial-to-global-chrome-supply-chromium-2017-hears-2017-11-10

© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firms vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Chromite market overview by geography South Africa Chromite reserves are proven deposits that are economically South Africa is the world’s largest source of chromite. feasible for extraction. Chrome ore refers to mined chromite Historically it has accounted for approximately 72 percent of reserves. Similar to other commodities, the amount of global reserves, as shown in Figure 2. As a result of South reserves mined is dependent on a variety of factors including Africa’s abundant chromite reserves, it has well developed but not limited to; commodity pricing, government taxes infrastructure and technology allowing it to be one of the and policies, available technology and labor expertise, and lowest-cost chrome ore producers in the world. In 2016, dependability of supply chain infrastructure. these advantages allowed South Africa to produce 49 percent of the world’s chrome ore, as shown in Figure 3. Roughly half Figure 2: Chromite reserves by country6 of chrome ore that is produced in South Africa is exported Other for smelting into ferrochrome which is then processed into 8 Finland 9% stainless steel . 2% Kazakhstan Zimbabwe 5% Zimbabwe is historically the second largest location for chromite reserves, accounting for approximately 12 percent of Zimbabwe the global chromite reserves. Zimbabwe chrome ore production 12% has increased in recent years following domestic changes to economic and energy policy. In June 2015, the government lifted a ban on chrome exports that had been in place since 2011 and eliminated a 20 percent export tax to help the sector. South Africa 72% The original intent of the prior ban was to increase the smelting of chrome ore into ferrochrome in Zimbabwe. Instead chrome Figure 3: Chrome ore produced by country7 stockpiles grew because of the lack of smelting capacity, high production costs and power shortages. The government Other has also increased its royalty from 2 percent to 5 percent on 14% chrome but subsidizes electricity tariffs for chrome processing9. As a result, Zimbabwe’s chrome exports have increased. Turkey Between January to September 2016 chrome concentrate 9% South exports were 100kt and in the same 2017 period exports Africa increased to 385kt10. 49% Kazakhstan Kazakhstan Kazakhstan accounts for 5 percent of global reserves. In 18% recent years, Kazakhstan has taken steps to attract mining investments in order to increase its supply of chrome ore, India which now accounts of 18 percent of the global supply. 11% For example, in December 2017, the government adopted legislation to replace regulations that had governed mining- Note others includes: Turkey (0.9%), India (0.9%), related operations since 2010. The new code is expected Russia (0.5%), Brazil (0.2%), and others (6.9%)South Africa to attract investments from foreign mining and exploration companies since the legislation, procedures and practices within the country have been simplified11, 12.

6 Stainless Steel in Figures, ISSF, 2015, http://www.insg.org/docs/issf_stainless_steel_in_figures_2015_english.pdf 7 Mineral Commodity Summaries, U.S. Geological Survey, Published January 2018, Page 2, Mine Production Data from 2016, https://minerals.usgs.gov/minerals/pubs/commodity/chromium/mcs-2018-chrom.pdf 8 Annual Report, Tharisa PLC, 2017, Page 27, http://www.tharisa.com/pdf/investors/annual-reports/2017/annual- report-2017.pdf 9 ‘Press Statement On The Lifting Of The Ban On Export Of Chrome Ore’, Ministry of Mines and Mining Development, June 2015, http://www.mines.gov.zw/?q=press-statement-lifting-ban-export-chrome-ore 10 ‘Chrome exports to drive mineral earnings’, The Source, October 2017, http://source.co.zw/2017/10/chrome-exports-to- drive-mineral-earnings-mmcz/ 11 ‘Kazakhstan Adopts New Subsoil Use Code’, Lexology, January 2018, https://www.lexology.com/library/detail. aspx?g=3b6ff123-528a-425e-9447-0fd3b8f86fed 12 ‘Legal Reforms in the Kazakhstan Mining Sector’, Michael Wilson & Partners, January 2018, http://mwp.kz/presentation/ legal-alerts/legal-reforms-in-the-kazakhstan-mining-sector/

© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firms vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Global stainless steel market forecast Figure 4: 2017 Stainless steel production by country15 In 2015, there was a sharp decline in stainless steel Other USA prices due to the economic downturn in China, a main Indonesia 3% 6% Japan 2% influencer on the stainless steel market. The Chinese 6% economy and stainless steel prices rebounded in 2017 and analysts predict a stabilization of prices, demand and supply between 2018 and 2021. Europe Stainless steel demand is mainly driven by China, which 15% accounted for nearly half of total demand in 2016, and China then by Asia (except China) and Europe. Demand for Korea 53% 5% stainless steel between 2016 and 2021 is expected to Taiwan increase from 45.6 to 54.1 MT, resulting in a compound 3% annual growth rate (‘CAGR’) of 3.5 percent. Future India demand is expected to be driven by South America, 7% China and the rest of Asia. This compares to the previous five years (2011-2016), where demand grew at Figure 5: Stainless steel demand and supply a CAGR of 6.2 percent13. 60 Similarly, China has driven stainless steel production 50 over the past decade. In 2017, China reached 40 53 percent market share, as shown in Figure 4. Global onne s supply of stainless steel between 2017 and 2022 is 30 t on expected to increase from 48.4MT to 57.7MT, resulting 20 14 in a CAGR of 3.5 percent . Milli 10 As previously mentioned, ferrochrome with nickel are processed into stainless steel. Over the last decade 0 1 1 1 1F 1F F 1F stainless steel production increased its use of China’s USA Japan Europe Korea Taiwan commercialized nickel pig iron (NPI) 16, a cheaper substitute of pure nickel17, which in turn decreases the cost of India China Indonesia Other Demand stainless steel. It is expected that a portion of stainless Source: Stainless Steel Market Update, UBS, August 2017, steel demand will continue to be meet by stainless steel and Commodities Compendium, Macquarie Research, produced using NPI rather than pure nickel. Using NPI March 2018, Thomson One rather than pure nickel, is not expected to influence the need of ferrochrome.

13 ‘Stainless Steel Market Update, Shining again on improving fundamentals’, UBS, Global Research, 29 August 2017, Figure 7. 14 Commodities Compendium, Macquarie Research, March 2018, Thomson One 15 Commodities Compendium, Macquarie Research, March 2018, Thomson One. Data retrieved from 2017. 16 Nickel pig iron (NPI) is a low grade ferronickel invented in China as a cheaper alternative to pure nickel for the production of stainless steel. An integrated NPI utilizes nickel sulphide concentrate as part of the stainless steel production process. This innovation offers significant potential benefits to producers of suitable nickel sulphide concentrate feed including lower costs due to simpler processing, compared to traditional smelting and refining. http://www.wikiwand.com/en/Nickel_pig_iron, https://www.newswire.ca/news-releases/royal-nickel-welcomes-construction-of-worlds-first-processing-plant-capable-of- producing-stainless-steel-directly-utilizing-nickel-sulphide-concentrate-513978301.html 17 The future of nickel: A class act. November 2017. https://www.mckinsey.com/~/media/McKinsey/Industries/Metals%20 and%20Mining/Our%20Insights/The%20future%20of%20nickel%20A%20class%20act/The%20future%20of%20 nickel%20A%20class%20act.ashx

© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firms vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Commodity pricing ferrochrome production, resulting in a 50 percent year-on- Stainless steel prices drive the pricing for ferrochrome, year decrease of exports to China. Subsequently, the lack of and in turn that of chrome ore. Historical and forecasted ferrochrome supply combined with a strong stainless steel ferrochrome and chrome ore pricing are presented in demand caused ferrochrome prices to increase again in the section below with the understanding that the end Q3 2017. commodity, stainless steel, is the main price driver. Ferrochrome prices are expected to hover around US$1.13 Ferrochrome’s historical and forecasted pricing per pound by 2020. In the short term, there is a possibility of seeing slightly bearish market movement as moderate Over the last few years, ferrochrome pricing has fluctuated demand growth will be fulfilled by ferrochrome volumes from due to market and economic factors. The consensus over the mid-term is that the positive outlook of stainless steel and South Africa and increases in Chinese stockpiles. This may 20 stabilized markets factors will help smooth prices. put some pressure on prices which are expected to drop to US$1.16 per pound by 2018. In the first half of 2016, low ferrochrome prices and the appreciation of the South African Rand negatively impacted Chrome ore historical and forecast pricing the profitability of smelters, which are mainly owned by Similar to ferrochrome, chrome ore prices in recent years chrome extractors and processors. Consequently, 6 out of have been closely related to the demand and production of 14 South African smelters cut back operations by mid-2016, stainless steel in China. affecting the supply of ferrochrome and mining efforts of chrome ore18. The lack of ferrochrome supply then drove up In 2015, chrome ore prices collapsed because of a sharp prices in the second half of 2016. downturn in the Chinese economy, contracting the demand In 2017, Chinese smelters and other marginal producers for stainless steel. This prompted many South African increased ferrochrome supply to take advantage of high chrome producers to cut production and undertake care and alloy prices19. This additional supply of ferrochrome led to maintenance programs at their mines. The resulting decrease normalized prices in the first half of 2017. In June-July 2017, in chrome supply was substantial and created a shortage in new winter electricity tariffs in South Africa led to decreased Q4 2016 when stainless steel demand revived in China.

Figure 6: Historical and forecasted chrome ore and ferrochrome prices

1.8 270 300 249 1.6 250 211 199 190 191 1.4 168 200 163 165 162 153 1.40 1.2 150 1.25 1.21 1.19 1.16 1.16 1.12 1.13 1.13 1.0 1.07 100 Chrome ore USD/t ore Chrome Ferrochrome USD/lb Ferrochrome 0.96 0.8 50

0.6 0 11 1 1 1 1 1 1 1 1 1

Ferrochrome Historical Ferrochrome Forecasted Chrome Ore Historical Chrome Ore Forecasted

Source: Bloomberg, KPMG analysis, (graph represents annual trends only)

18 Stainless Steel Market Update, UBS, August 2017, Thomson One 19 Metals Quarterly, HSBC, October 2017, Thomson One 20 ‘Eurasian Resources Group: base metals outlook’, International Mining, November 2017, https://im-mining. com/2017/11/01/eurasian-resources-group-base-metals-outlook/

Analyst reports describe these corrections as cyclical and onne s temporary, and expect a balanced market in 2018, with the 10.0 t on price of chrome ore expected to settle around US$199 per ton. Over the next 2 to 3 years chrome ore supply is expected Milli 5.0 to plateau or increase marginally, potentially softening the price of chrome ore. It is expected that chrome ore prices will - 1 1 1 1F 1F F 1F F continue to be dependent on the production expectations of stainless steel21. Supply Demand

Key supply and demand drivers Source: Commodities Compendium, Macquarie Research, March 2018, Thomson One As previously discussed, stainless steel demand is the major driver for demand of ferrochrome and chrome ore While South Africa continues to be the biggest producer of commodities. The demand of stainless steel was discussed chrome ore, it has recently slipped from the top position in earlier in section 5, but it should be noted that the supply of ferrochrome production. In 2016, China produced 43 percent stainless steel is dependent on ferrochrome and chromite (4.6 MT) of the world ferrochrome output and South Africa commodities as discussed below. produced 33 percent (3.5 MT). The decline in South African Ferrochrome production has occurred mainly on account of unfavorable electricity and price factors25. Chinese efforts to supply stainless steel remains the key driver of ferrochrome demand, whereas ferrochrome supply South African miners have traditionally faced constrained is heavily dependent on electricity supply and pricing. electricity supply and high electricity costs. Eskom, the state-owned utility generates approximately 95 percent of Chinese stainless steel supply is anticipated to grow at a the electricity used in South Africa. Ferrochrome smelting is modest CAGR of 4.1 percent during 2017-21 because of an energy-intensive process. In the face of high tariffs and stricter environmental regulations and the enactment of power shortages over the past few years, producers have cut 22 anti-dumping duties by importing nations . Given the link production of ferrochrome and increased production of other between stainless steel supply and the demand for its input materials, reducing their dependence on expensive electricity. ferrochrome, it is expected ferrochrome demand will also have modest growth over the next 5 years. As of 2017, Eskom is working towards augmenting power supply by rationing electricity tariff increases and The supply of ferrochrome diminished following the price commissioning power plants26. However, there is still a collapse of 2015-16 leading to a massive shortage of the massive requirement for additional electricity generation and commodity in late 2016 when the Chinese demand for ridding the utility of debt and corruption scandals to ensure stainless steel strengthened23. The increase in ferrochrome adequacy of ferrochrome supply from South Africa 27, 28.

21 Commodities Compendium, Macquarie Research, October 2017, Thomson One 22 Metals Quarterly, HSBC, October 2017, Thomson One 23 Commodities Compendium, Macquarie Research, October 2017, Thomson One 24 Metals Quarterly, HSBC, October 2017, Thomson One 25 ‘South Africa crucial to global chrome supply, Chromium 2017 hears’, Mining weekly, November 2017, http://www.miningweekly.com/print-version/ south-africa-crucial-to-global-chrome-supply-chromium-2017-hears-2017-11-10 26 ‘Strong outlook for recovering ferrochrome industry’, Polity South Africa, March 2017, http://www.polity.org.za/article/strong-outlook-for-recovering- ferrochrome-industry-merafe-2017-03-08 27 ‘Goldman Sees Eskom as Biggest Risk to South African Economy ‘, Bloomberg, September 2017, https://www.bloomberg.com/news/ articles/2017-09-22/goldman-sachs-sees-eskom-as-biggest-risk-to-s-african-economy 28 ‘South Africa - Electrical Power Systems’, U.S. Department of Commerce, August 2017, https://www.export.gov/article?id=South-Africa-electrical-power

Figure 8: Chrome ore supply and demand 40 35 30

onne s 25 20 t on 15 Milli 10 5 - 1 1 1 1 1 1 1 Supply Demand

Source: Metals and Mining, HSBC, March 2018, Thomson One

29 Metals and Mining, HSBC, March 2018, Thomson One

Appendix Table 1: Recent M&A activity for chromite industry

Recent chrome M&A activity Announced Completion Deal status Target company Bidder company Deal value date date (US$ million)

31 July 2017 6 November Completed Phoenix Platinum Mining Sylvania Platinum Limited 7 2017 Proprietary Limited

19 May 2016 23 August Completed International Ferro Metals Samancor Chrome Limited 33 2016 (SA) (Pty) Limited African Rainbow Minerals

25 June 2015 30 June Completed Limited (Dwarsrivier Chrome Assore Limited 37 2015 Mine) (50 percent Stake)

Eric Wolfe Senior Manager Deal Advisory, Global Infrastructure Advisory KPMG in Canada 416-777-3713 [email protected]

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